April 12, 2010
"Where's the Consumption Disaster?", Again
Back in November 2009, Casey Mulligan asked this question, and observed:
Both of these [disposable income and consumption] are HIGHER in September 2009 than they were a year earlier.
I observed that it made sense to look at per capita values; and that changed the conclusions substantially.
Per capita consumption in September 2009 had not re-attained September 2008 levels. In fact, what's interesting is that only in January 2010 did real per capita consumption re-attain pre-Lehman bankruptcy levels. For sure, they have not, and will not soon, exceed previous peak levels in 2007M11.
Figure 1: Log per capita consumption, in millions Ch.2005$ (blue); 1967M01-2010M time trend (red). Recession dates shaded gray, assumes last recession ends 2009M06. Source: BEA via FREDII, and author's calculations.
Is this a consumption disaster? Perhaps it's only part of the necessary rebalancing of the US economy; but I suspect (given the evidence on how consumption moves with current disposable income) that the consumption response was not solely an optimal response to a decline in anticipated permanent income (see discussion of the permanent income hypothesis in this post). I also believe in the absence the ARRA, consumption would have declined even more than it did.
Posted by Menzie Chinn at April 12, 2010 07:35 PMdigg this | reddit
I always wondered at the point Professor Mulligan was trying to make as he opposed ARRA, the purpose ARRA was enacted was to prevent a "consumption" disaster, and as a result of being enacted the "consumption disaster" was averted. It would have been interesting if a "scientific" economist like Professor Mulligan would have constructed a model of what consumption would have been like in September of 2009 without ARRA, but he did not.
Posted by: sherparick at April 13, 2010 05:05 AM
If not a consumption disaster,it may be someone else
Credit cards loss rates and personal bankrupcy filing (source FDIC)
PS One may assume that Murphy s law may as well apply somewhere else in Europe
Posted by: ppcm at April 13, 2010 05:06 AM
Transfer payments are currently making up over 20% of personal record, by far a record. During the 2002-early 2008 boom, transfer payments made up a little over 12% of personal income. It seem to be that consumption continues to be heavily subsidized by the govt. For over a year, the economy was essentially about: Federal Reserve printing money and buying Federal govt debt, Federal govt handing out money to people directly or indirectly via deficit spending, the US people or US business spending that money, consumption and thus GDP go up. But what will happen now after the Federal Reserve has stopped printin??? That, I believe, is the big question determining the future of consumption growth.
Posted by: Lamont at April 13, 2010 09:26 AM
I know from studying our (Wisconsin's) state personal income data as well as neighboring states that a very large contributor to the relative stability and strength of disposable personal income was the increase in transfer payments that resulted from ARRA. Of course, there were also the limited tax rebates and expanded credits that were not insignificant when all summed together. There is very little doubt in my mind that those have played a very significant role in the stability and then recovery of PCE.
Posted by: Brian Quinn at April 13, 2010 09:52 AM
Lamont, there was no printing. It was always neutralized. The truth is, the Federal Reserve system actually is far older than the "FED". Matter of fact, the maybe we can create our own private banking scheme as well!!!!
Posted by: The Rage at April 13, 2010 11:57 AM
You are spouting BS here. In normal open market operations, the FED can claim they are not 'printing' because they enter into short term agreements, that have specified end dates. The best analogy is a juggler. The number of balls in the air at once is analgous to net credit added to the system.
But the FED has ballooned it's balance sheet 3 fold...with no commitment to exit. That is defacto printing. They took in bonds (MBS and Fed) that were on the books of money center banks...and created money in the accounts of those banks. They may have made a ledger entry on their own books...but it is still credit-money created out of thin air.
Much/most of that money went back to the Federal Government...which is where the transfer payments come from.
We are in a classic trap, and there is no exit. The only meaningful growth has been borrowed. The borrowings were used for consumption. They were not used to invest in capital goods which pay for themselves. This means there is essentially no growth multiplier to this new debt. It is a one time shot. To create the growth again...more debt must be taken on. This is nothing but a Ponzi scheme. It can go on for a few years...until the entire world monetary scheme collapses.
All we have done is kick the can down the road for a few more years. The real failure should have been allowed to happen in 2001-2003...but we are too cowardly to take our medicine...so we blew a huge bubble that threatened the whole economy. Now that bubble pops...and we repeat on a scale 10x larger. We never learn.
This will end only one way....with the complete destruction of the US dollar, and economic disaster that makes 2008 look like childs play.
Posted by: Brant Williams at April 13, 2010 02:36 PM
I also believe in the absence the ARRA, consumption would have declined even more than it did.
You are absolutely correct that the statistics would have shown a greater decline in the absence of ARRA. So? They would have been even higher if the government had taken 100% of all income and spent it on "shovel ready" projects in the states, you know digging holes then covering them up. Had that happened you would have had no savings and fantastic consumption, the perfect Keynesian solution.
Posted by: RicardoZ at April 13, 2010 02:45 PM
First of all, you really didn't address what I said. I made a very specific argument that ARRA had helped to shore up both income and PCE during the last several quarters. I'm not sure that can really be disputed. You decided to take that and turn it into some Ron Paulist rant.
Secondly, I have never bought into the idea that we necessarily have to endure periods of severe austerity and economic contraction to "take our medicine". That's classic Austrian School tripe. I do subscribe to the view that asset bubbles should not be propped up through loose monetary policy. However, real economic activity was hardly at unsustainable levels in 2007. In fact, prior to the recession, we were slightly below potential GDP. The "boom" years of 2003-2007 were not exactly a "boom". What we had was a tremendously fragile financial system that was over-leveraged to over priced real estate. The idea that we have to allow the economy to contract until things have "run their course" is an old barbaric view of economics that does not real have any currency anymore.
Posted by: Brian Quinn at April 13, 2010 08:13 PM
Here's a paraphrase of what Jason S. Grumet of the Bipartisan Policy Center said last week at the EIA Conference in Washington:
To get the budget under control, there needs to be a shift of about $600 bn per year in the Federal budget, of which prospectively half would be tax increases and half spending cuts.
To put that into perspective: $300 bn of tax increases is $1,000 per capita across the board in the US. $300 bn is about half of Federal pension spending, and about 1/3 of the (pretty high) defense budget.
Posted by: Steven Kopits at April 14, 2010 03:40 AM
"I suspect (given the evidence on how consumption moves with current disposable income) that the consumption response was not solely an optimal response to a decline in anticipated permanent income "
Care to make this sentence a bit more plain? You seem to be contrasting between smoothed consumption based on current valuations of future incomes to MPC of current incomes, but I get a feeling you are conflating the two as well.
Posted by: Ryan Vann at April 14, 2010 12:32 PM
Ryan Vann: There is a large literature on the excess covariation of consumption with current disposable income. That can be explained in a variety of ways, including rule-of-thumb consumers, liquidity-constrained consumers, among (many) others. I am more inclined to believe in the liquidity constrained consumer perspective, which stands in opposition with the unconstrained life-cycle/permanent income hypothesis view of aggregate consumption behavior (see this post for further explication).
Posted by: Menzie Chinn at April 14, 2010 02:39 PM